Are We Fools for Saving Our Money?



What would be the point of a blog if we didn’t explore an idea that may be slightly controversial?

Anyone who reads this blog knows that my quest for financial freedom heavily relies upon disciplined saving and planning for retirement. Like many people, I am using my employer-sponsored retirement plans, IRA’s, and personal savings to build up a fortune that I can one day live off of.

All of that is fine and good in theory, but what if everything I just said was ALL WRONG! What if all the money I’m saving will one day be worthless? It sounds crazy, that’s exactly what one famous author is promoting in one of his new books.

Unfair Advantage:

Well known “Rich Dad Poor Dad” author Robert Kiyosaki suggests in his 2011 book “Unfair Advantage” that “ … a retirement plan such as a 401k is the worst way to invest (p. 18)”. His reason is simple:

• The US government has been devaluing the dollar since 1971 (when it came off the gold standard) (p. 3) and will continue to do so as our way of dealing with inflation and debt (p. 7).

• As a result, anyone with money idling in a 401k or retirement plan will be subject to the turbulence of the global economy, higher taxes, and inflation (p. 18); all of which will decrease the purchasing power of our savings.

• Therefore, he sums his opinion up by stating that “… savers will become the losers (p. 3)”.

Later on in the book, one of Kiyosaki’s guest contributors also tears down 401k plans (p. 133) claiming that:

1) They offer very low “true” diversification

2) They do not consistently perform well year over year

3) The fees are too high

4) They rarely ever do better than a simple index fund

 

Kiyosaki’s Alternative:

So if you’re not supposed to put your money into a 401k, then what ARE you suppose to do?

Do what Kiyosaki does: Make your money off of real estate! Why? Because just like in the game Monopoly, Kiyosaki promotes that “4 green houses = 1 red hotel” (p. 32). Metaphorically speaking, he’s trying to show you that if you’re on the receiving end of another person’s expenses, you’ll have income for life. Why the red hotel? Because Kiyosaki doesn’t just buy up single family houses. He and his wife are at a level where they broker 144-unit, 10 acre apartment complexes (p. 105). In fact, he shows you an example of how he made $1 million dollars tax free on that very deal.

In all fairness to the book, Kiyosaki also repeatedly states that you fundamentally need to invest in your own financial education and find what works for you, whether it’s real estate, business ventures, paper assets (i.e. stocks), or commodities (i.e. gold).

Am I the Fool?

I have a ton of respect for Kiyosaki and was just as blown away as everyone else the first time I read “Rich Dad, Poor Dad”. But my personal style of investment is obviously a blatant disagreement with this point of view. I did not cancel my 401k and go buy an apartment complex downtown.

But let’s play this out. Am I the fool? Kiyosaki is a multi-millionaire! I am not!

For the sake of argument, let’s try to see how his perspective may be true:

• Kiyosaki is not the only author to predict that the US economy is heading for trouble. There are two different books both titled “Aftershock” that feel very strongly there is more trouble ahead in the future.

• Logic states that if there was inflation, the price of rent would rise with market prices. Therefore, the income you make on it would be protected from inflation.

• The last few decades have had some strange economic events – Black Monday in 1987, the dot.com bubble, the housing bubble, the Great Recession, etc. Why do we seem to keep having more and more of them?

• Stock prices continue to go up at a rate higher than company earnings or GDP. This trend cannot continue forever.

• Our National Debt is at an all time high! Unfortunately, the turbulence in Washington seems to demonstrate that there is no resolution in our future.

• Does everyone remember last Summer when the US debt rating got downgraded for the first time in history? Again, thanks Washington.

• 401k fees are expensive compared to simple index funds like Vanguard. Why can’t they be cheaper? Over time, this will erode our earnings.

• If you invest in a diversified portfolio of stocks, are you REALLY diversified when the entire stock market goes down?

• 2000 – 2010 is being called the “lost decade” because virtually all the earnings were wiped out. How much longer can we really use the historical 8% return to predict how much our portfolios will be in the future?

So what do you think? Have you ever considered that saving your money may NOT be the safest or best thing to do with it? Do you subscribe to Kiyosaki’s logic that we should focus on acquiring assets to generate wealth rather than our employment income? Please feel free to share.

 

Related Posts:

1) Book Review: “Rich Dad, Poor Dad” by Robert T. Kiyosaki and Sharon L. Lechter

2) A Strategy for Maxing Out Your Retirement Savings

3) Retiring on the One-Million Dollar Myth

Photo Credit: Microsoft Clip Art

Comments

  1. says

    It sounds like he makes a very good point about savings.  If the economy tanks, that money saved up won’t be worth very much.  Just look at how the currency has been affected in countries with struggling economies.  That could happen at home too.  This post makes me want to reconsider putting money into a retirement savings and instead put it somewhere safer.

    • says

      Yes, he does make some good points! But it all depends on whether you believe in his doom-and-gloom predictions. Even though everything he said is very possible, I’m more of an optimist and believe we merely riding through just another economic cycle. History is plagued with politicians and businesses making terrible decisions. Yet, periods of growth and recession still cycle on.

      • says

        Yes it does come down to optimism.  History has shown that things will probably turn out right, but there is some scary stuff happening abroad which could have huge effects on the economy.

  2. says

    Geez. I am big fan of “poke the expert in his back yard” approach. And you did really great job here with this tight writeup. Very good read. You have got me scratching my head… no kidding. I have been discussing this w/my wife, and we come to real estate time and again. I motivate it [similar as you put it here] that it’s at the bottom of the Maslow’s hierarchy, the shelter, the basic need. So you possess this basic need for hire chances it will be in demand, no matter ups and downs. People need shelter, it’s a basic need.

    • MMD says

      Exactly! People will always need a place to live. And especially in rougher economic climates, I think you would have a soaring demand of renters. Good call also on connecting it to Maslow’s hierarchy of needs. Outside of real-estate, most marketers argue that you should always appeal to the most basic of human needs when positioning anything you plan to sell.

  3. says

    I know a number of people that tried to make money in real estate and I know of only one who did.

    I only invested in stocks. Far less hassle that buying real estate to rent out etc. However, when I buy stocks, I look at it as buying a piece of a company. Companies can be solid assets, whereas I do not look on currency as a solid asset.

    I have also read Robert Kiyosaki and he says some interesting things. I just felt that real estate investing was not for me.

    • MMD says

      The more and more blogs I read the more and more interested I become in real estate. There seems to be a great deal of people who have found their niche with it. I am very much like you where I’m not totally convinced if it is for me yet or not, but I’m starting to warm up.

      Good points about buying stocks relative to currency. Even if inflation goes out of control, your percentage of that asset will still be stronger relative to other assets and currencies.

      If you haven’t read the Robert Kiyosaki book I mentioned here, stay tuned because I have a complete book review coming up within the next two weeks. Some of his ideas are kind of ridiculous, but it makes great reading and could possibly make us all rich.

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  1. […] that comes from living in your own place. Is buying a home a good idea?MMD presents Are We Fools for Saving Our Money? posted at MyMoneyDesign, saying, Is there a chance all the money we’re saving for retirement […]

  2. […] that comes from living in your own place. Is buying a home a good idea?MMD presents Are We Fools for Saving Our Money? posted at MyMoneyDesign, saying, Is there a chance all the money we’re saving for retirement […]

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